A case for Ostrom’s Polycentricity: Integrating Commons Management in Blockchain Governance
Authors:
Sangita Gazi, Ph.D. Researcher in Law and Macroeconomics of Central Bank Digital Currencies, The University of Hong Kong.
Navroop Sahdev, Founder and CEO, The Digital Economist; Connection Science Fellow, Massachusetts Institute of Technology.
Every man is locked into a system that compels him to increase his herd without limit– in a world that is limited. Ruin is the destination toward which all men rush, each pursuing his own interest in a society that believed in the freedom of the commons.
– Hardin (1968)
- Blockchain as a Digital Commons
Since its inception, Nobel laureate Elinor Ostrom’s idea of commons management has attained significant traction in governing both the physical and digital commons. In the physical world, the commons are defined as natural resources with an open access (such as fisheries, forests, lakes, or pastures). It is a “general term for shared resources” with stakeholders’ equal interest. By contrast, digital commons are considered as “a subset of the commons” applicable to the resources created and maintained online (such as digital infrastructure, the Internet, digital information repositories, etc.). The physical and digital commons provide a solution to preserve shared resources through collective actions, focusing on sustainability and democracy.
Although theoretically established, the applicability of the concept of ‘digital commons’ to digital infrastructure is still scarce. In 2005, Frischman introduced the economic theory of treating infrastructure such as the Internet as a commons. The theoretical contribution of Frischman was significant to the extent that it provided important insights regarding Internet governance that were previously thought to have belonged to the management of private markets (private property) or government control (public good). Frischmann shows that “the Internet creates value as a commons” with a “nontraditional” market value and propels a strong argument as to why the Internet should be managed in an open, accessible manner. The emerging discourse also favors treating data as commons.
Analyzing the contemporary discourse on digital commons and Ostrom’s work on physical commons governance (see below), we argue that there is a strong case to be made for treating blockchain as digital commons. This idea is separate from blockchain-based commons governance and the governance of commons-based peer production communities. The underlying argument in treating blockchain as digital commons is that while a blockchain protocol, like physical commons, does not particularly suffer from the problem of depletion or overuse, it can face the consequences arising from the misuse of governing participants’ voting power, community’s threat to exit the network, lack of liquidity, and immature liquidation. The community behavior, if unmanaged, can potentially jeopardize the long-term growth of a blockchain-based ecosystem and run the risk of losing its inherent value. Treating blockchain as a digital commons also brings blockchain governance under Ostrom’s idea of commons governance which provides an overarching framework for sustainable preservation of common-pool resources inherent in a blockchain protocol (such as a native coin).
Most scholars accept blockchain as a given technology capable of generating various use cases, such as tokenization, distributed autonomous organization, and smart contracts, among others. In the governance space, blockchain’s on-chain and off-chain governance also suffers from many technical questions, such as decision-making, centralized control, lack of incentives, and overall absence of network value reflecting community interests. To solve these problems and incentivize the community to make value-driven decisions, we recommend Ostrom’s “polycentric approach”, which is vital in realizing a decentralized structure of governance within a blockchain protocol and preserving the long-term growth of an ecosystem.
2. Ostrom’s polycentric approach in blockchain governance
The underpinning theory of the governance of the commons derives from Lloyd’s work which introduced the idea of the ‘tragedy of the commons’. He argued that the commons would eventually collapse if driven by irrational self-interest. Later, in 1968, Hardin reiterated Lloyd’s hypothesis indicating the inherent danger of an unmanaged commons. He posited that with unfettered access to a commons, individuals are likely to act in their self-interest and exploit the resource to their maximum advantage. Hence, the management of the commons should embed mandatory restraints– “mutual coercion, mutually agreed upon.” The implication of previous works on the tragedy of the commons gives rise to a monocentric way of governing finite resources, where the problems are addressed with a top-down approach by a single authority, such as private ownership or government control.
Despite the growing popularity of private or government control over finite sources, Ostrom’s work is a departure from this monocentric approach and provides a viable alternative — a more sustainable and inclusive approach to governing the commons. Ostrom shows that if commons are governed in bottom-up nested tiers with embedded rules regarding participation, enforcement, and dispute resolution, the resources can be preserved responsibly, sustainably, and equitably in a community. Devised on eight “design principles”, one of the key tenets of Ostrom’s work is that it introduces a polycentric governance structure founded on decentralization (as in, multiplicity in decision centers), a comprehensive system of rules, and fair competition among participating individuals. As opposed to the monocentric approach, in which a single authority decides and imposes the solution on everyone in the community, Ostrom’s polycentricity implies a collaborative governance approach inclined to conceive solutions driven by community interests.
We envision a similar governance framework in a blockchain protocol founded on Ostrom’s polycentric approach to commons governance. Until now, Ostrom’s design principles have been successfully applied to physical common-pool resources. In the digital world, Schletz et al. (2022) build ‘a nested climate accounting architecture’ incorporating distributed ledger technology, machine learning, and the internet of things. In our ongoing work on “A Value-Driven Blockchain Network: The Efficacy Of Ostrom’s Design Principles In Designing A Collaborative Community Governance Model”, we deploy Ostrom’s principle of ‘building a nested enterprise’ to build a collaborative community governance model for a blockchain protocol wherein governing participants are nested in tiers, tied to the ecosystem with their shared community interests and responsibilities, and bound by (once agreed upon voluntarily) community-set rules. We believe a bottom-up interconnected blockchain ecosystem ensures sustainable preservation of common-pool resources (such as native tokens in a blockchain ecosystem) while maintaining a decentralized decision-making structure– the original promise of blockchain technology.
3. A proposed governance framework
The idea of polycentricity in a blockchain protocol is not new. A previous paper by Alston et al. (2022) shows that a blockchain protocol, by its design, is polycentric. It has multiple decision-making centers (nodes), is subject to rules emanating from the decision-making nodes, and is governed by the internal and external sources of competition (Alston et al. argue that internal sources include protocol design and voting on updating governance protocol, while external sources include competition from other blockchain networks). However, our contribution is to introduce polycentric design in a blockchain protocol’s governance mechanism where community members share authority and responsibility, sort out their problems, and develop solutions. This polycentric governance design fundamentally relies on a layered framework (figure 1) where governance participants are organized into different tiers and committed to their governance responsibilities proportional to their rewards.
This proposed framework has three main elements:
First, the governance structure incorporates Ostrom’s design principles into three categories (figure 2). They are participation rules, enforcement and execution rules, and a dispute resolution mechanism. Participation rules refer to the rules and conditions of being a governing participant. While participation in blockchain governance is voluntary, the rules are mandatory. The enforcement and execution rules refer to the circumstances in case there is a breach of rules by a governing participant. In the event of a dispute, where a governing participant wants to contest an imposed sanction or threatens to exit, the dispute should be resolved in a prescribed manner agreed upon by the community.
Second, preserving sustainability and ensuring the long-term growth of a blockchain protocol is underpinned in a governance framework that balances governing participants’ rewards and responsibilities and incentivizes them to make decisions driven by community interest only. Therefore, drawing on the model of a “constituent assembly”, the constitution of a blockchain protocol can expand to include good governance rules, such as accountability, transparency, fairness, responsibility, and sustainability (economic, environmental, and technical).
Third, the essence of Ostrom’s polycentric approach is based on democracy and voluntary association. Therefore, the proposed governance framework includes an exit strategy for a governing participant (figure 3) in the event of a difficulty, and if the governing participant is no longer capable of performing their governor duties. This is crucial to prevent immature liquidation and protect the network from unpredictable behaviors.
4. Concluding remarks
In our design, we envision community members with an equal right to participate in governance tiers, where each participant has the freedom to choose the level of commitment and reward voluntarily. Given the potential benefits of blockchain, it is imperative to incorporate a stable decentralized governance structure capable of promoting network value and reliability through a set of community-agreed rules and behavior. Ostrom’s polycentric approach to commons governance ensures that the community is at the center of the decision-making process that drives an ecosystem’s network effects, and its micro- and macro-economic goals. If implemented, the framework will serve as a key catalyst in developing a long-term value-driven relationship between a blockchain-based network and its governing participants.
